As I was reading this morning, I got to thinking about the market (imagine that …). I thought about the reality that at any given moment, you can put two well-placed market analysts in a room, give each the same data, and each will come up with a completely different conclusion as to a) the current state of the market or b) where the market is headed.
- A recent survey by Bank of America Merrill Lynch shows fund managers have more cash holdings now than at any time since June 2012.
The above data is what we have on hand and, in a single article this morning, I read two different conclusions derived from the data. Here is the first.
- This could set up for a year-end chase rally when we start to see a lot of this money get put to work. We could see a massive move up.
Clearly, the analyst above thinks the cash holdings of fund managers will result in what we have seen over the last five years – a big fall run up in the market. Certainly, history is on his side, as is the intuitive thinking that the cash fund managers are holding has come from folks who want to make their money work. Now, to make their clients’ money work, fund managers have to put it somewhere and right now the hottest thing around is the equity market.
Yet, the other side of this debate suggests something a bit different, something not so intuitive, a conclusion based on the reality that, ironically, the equity market is the hottest thing around right now.
- They don’t see the value, so they are sitting on that cash. If they have not been buying stocks until this point, there is nothing that is going to get that money into the market.
Interesting … The argument goes that since the fund managers have not been putting the cash to work thus far in a hot equity market, they won’t’ because it is not prudent to do so. Translation? Simply, the market is going to fall and to put money to work now is only courting losses.
- I think there is an air pocket below, and I would once again, be a seller here as I have been.
Analyst two above has an interesting take on the current market. It sounds as if he has been buying the dip and selling the rip. Not a bad way to play the market, if you can get a handle on when the rips and dips are coming. As well, as of late, there have not been many rips or dips, as the market has traded in a fairly tight range, save for the recent two-day double dip.
On the other hand, analyst one suggests the overall strong trend will continue, that there will not be a dip, necessarily, especially if the already positive economic data improves in the future.
- When we start to see more data come in positive, you will start to see that cash be put back into the market.
The above assumes that the cash in the hands of fund managers comes from the selling of assets. That might be partially true, but as I noted yesterday, the flow of money into funds is stronger than it has been since February, so a bunch of that cash is new money, money from clients wanting to make their money work.
So, there you have it. Analyst one says the market is likely going up further this fall when the excess cash gets put to work (or back to work) and analyst two says it is going down because investors will see no reason come fall to put any of that cash to work if they have not done it as of this late date. The market will fall of its own weight without new support.
Me? I like analyst one’s argument, if for no other reason than nothing attracts money like money making money, and in this current market that is the case. As well, if the economic data continues to paint a positive picture, the allure to the market will be just a bit too strong to resist.
Trade in the day; invest in your life …
